FINANCIAL RISK MANAGEMENT SAMPLE QUESTIONS
How did I achieve 16/20:
• Watched the videos on Educloud during the semester
• Focused on the exercises on Educloud after each chapter
• Focused on the 20 exercises on Educloud made available at the end
• Made en remade the mock exam
• Read this document including 239 questions, especially focused on
theoretical questions. Many questions came back on the exam ;)
• Handbook: options, futures and derivatives by John Hull
• Q&A sessions during the semester
I didn’t study the guest lecture and probably lost 3/25 points there.
This subject is not perceived as an easy subject by my fellow students, but you have
to bear in mind that the exam contains questions that were answered somewhere in
the course or the same exercise with different numbers, so no new kind of questions.
I really hope this document can be of value to you!
,1.A one-year forward contract is an agreement where
A.One side has the right to buy an asset for a certain price in one year’s time.
B.One side has the obligation to buy an asset for a certain price in one year’s
time.
C.One side has the obligation to buy an asset for a certain price at some time
during the next year.
D.One side has the obligation to buy an asset for the market price in one year’s
time.
Answer: B
A one-year forward contract is an obligation to buy or sell in one year’s time for a
predetermined price. By contrast, an option is the right to buy or sell.
2
Cardlink
0
2.Which of the following is NOT true
A.When a CBOE call option on IBM is exercised, IBM issues more stock
B.An American option can be exercised at any time during its life
C.An call option will always be exercised at maturity if the underlying asset
price is greater than the strike price
D.A put option will always be exercised at maturity if the strike price is greater
than the underlying asset price.
Answer: A
When an IBM call option is exercised the option seller must buy shares in the market
to sell to the option buyer. IBM is not involved in any way. Answers B, C, and D are
true.
3
Cardlink
0
A one-year call option on a stock with a strike price of $30 costs $3; a one-year
put option on the stock with a strike price of $30 costs $4. Suppose that a
trader buys two call options and one put option. The breakeven stock price
above which the trader makes a profit is
A.$35
B.$40
C.$30
D.$36
Answer: A
When the stock price is $35, the two call options provide a payoff of 2×(35−30) or
$10. The put option provides no payoff. The total cost of the options is 2×3+ 4 or
$10. The stock price in A, $35, is therefore the breakeven stock price above which
,the position is profitable because it is the price for which the cost of the options
equals the payoff.
4
Cardlink
0
4.A one-year call option on a stock with a strike price of $30 costs $3; a one-
year put option on the stock with a strike price of $30 costs $4. Suppose that a
trader buys two call options and one put option. The breakeven stock price
below which the trader makes a profit is
A.$25
B.$28
C.$26
D.$20
Answer: D
When the stock price is $20 the two call options provide no payoff. The put option
provides a payoff of 30−20 or $10. The total cost of the options is 2×3+ 4 or
$10. The stock price in D, $20, is therefore the breakeven stock price below which
the position is profitable because it is the price for which the cost of the options
equals the payoff.
5
Cardlink
0
Which of the following is approximately true when size is measured in terms of
the underlying principal amounts or value of the underlying assets
A.The exchange-traded market is twice as big as the over-the-counter market.
B.The over-the-counter market is twice as big as the exchange-traded market.
C.The exchange-traded market is ten times as big as the over-the-counter
market.
D.The over-the-counter market is ten times as big as the exchange-traded
market.
Answer: D
The OTC market is about $600 trillion whereas the exchange-traded market is about
$60 trillion.
6
Cardlink
0
Which of the following best describes the term “spot price”
A.The price for immediate delivery
B.The price for delivery at a future time
C.The price of an asset that has been damaged
D.The price of renting an asset
, Answer: A
The spot price is the price for immediate delivery. The futures or forward price is the
price for delivery in the future
7
Cardlink
0
Which of the following is true about a long forward contract
A.The contract becomes more valuable as the price of the asset declines
B.The contract becomes more valuable as the price of the asset rises
C.The contract is worth zero if the price of the asset declines after the contract
has been entered into
D.The contract is worth zero if the price of the asset rises after the contract has
been entered into
Answer: B
A long forward contract is an agreement to buy the asset at a predetermined price.
The contract becomes more attractive as the market price of the asset rises. The
contract is only worth zero when the predetermined price in the forward contract
equals the current forward price (as it usually does at the beginning of the contract).
8
Cardlink
0
An investor sells a futures contract an asset when the futures price is $1,500.
Each contract is on 100 units of the asset. The contract is closed out when the
futures price is $1,540. Which of the following is true
A.The investor has made a gain of $4,000
B.The investor has made a loss of $4,000
C.The investor has made a gain of $2,000
D.The investor has made a loss of $2,000
Answer: B
An investor who buys (has a long position) has a gain when a futures price increases.
An investor who sells (has a short position) has a loss when a futures price
increases.
9
Cardlink
0
Which of the following describes European options?
A.Sold in Europe
B.Priced in Euros
C.Exercisable only at maturity
D.Calls (there are no European puts)
Answer: C
European options can be exercised only at maturity. This is in contrast to American
options which can be exercised at any time. The term “European” has nothing to do
with geographical location, currencies, or whether the option is a call or a put.
How did I achieve 16/20:
• Watched the videos on Educloud during the semester
• Focused on the exercises on Educloud after each chapter
• Focused on the 20 exercises on Educloud made available at the end
• Made en remade the mock exam
• Read this document including 239 questions, especially focused on
theoretical questions. Many questions came back on the exam ;)
• Handbook: options, futures and derivatives by John Hull
• Q&A sessions during the semester
I didn’t study the guest lecture and probably lost 3/25 points there.
This subject is not perceived as an easy subject by my fellow students, but you have
to bear in mind that the exam contains questions that were answered somewhere in
the course or the same exercise with different numbers, so no new kind of questions.
I really hope this document can be of value to you!
,1.A one-year forward contract is an agreement where
A.One side has the right to buy an asset for a certain price in one year’s time.
B.One side has the obligation to buy an asset for a certain price in one year’s
time.
C.One side has the obligation to buy an asset for a certain price at some time
during the next year.
D.One side has the obligation to buy an asset for the market price in one year’s
time.
Answer: B
A one-year forward contract is an obligation to buy or sell in one year’s time for a
predetermined price. By contrast, an option is the right to buy or sell.
2
Cardlink
0
2.Which of the following is NOT true
A.When a CBOE call option on IBM is exercised, IBM issues more stock
B.An American option can be exercised at any time during its life
C.An call option will always be exercised at maturity if the underlying asset
price is greater than the strike price
D.A put option will always be exercised at maturity if the strike price is greater
than the underlying asset price.
Answer: A
When an IBM call option is exercised the option seller must buy shares in the market
to sell to the option buyer. IBM is not involved in any way. Answers B, C, and D are
true.
3
Cardlink
0
A one-year call option on a stock with a strike price of $30 costs $3; a one-year
put option on the stock with a strike price of $30 costs $4. Suppose that a
trader buys two call options and one put option. The breakeven stock price
above which the trader makes a profit is
A.$35
B.$40
C.$30
D.$36
Answer: A
When the stock price is $35, the two call options provide a payoff of 2×(35−30) or
$10. The put option provides no payoff. The total cost of the options is 2×3+ 4 or
$10. The stock price in A, $35, is therefore the breakeven stock price above which
,the position is profitable because it is the price for which the cost of the options
equals the payoff.
4
Cardlink
0
4.A one-year call option on a stock with a strike price of $30 costs $3; a one-
year put option on the stock with a strike price of $30 costs $4. Suppose that a
trader buys two call options and one put option. The breakeven stock price
below which the trader makes a profit is
A.$25
B.$28
C.$26
D.$20
Answer: D
When the stock price is $20 the two call options provide no payoff. The put option
provides a payoff of 30−20 or $10. The total cost of the options is 2×3+ 4 or
$10. The stock price in D, $20, is therefore the breakeven stock price below which
the position is profitable because it is the price for which the cost of the options
equals the payoff.
5
Cardlink
0
Which of the following is approximately true when size is measured in terms of
the underlying principal amounts or value of the underlying assets
A.The exchange-traded market is twice as big as the over-the-counter market.
B.The over-the-counter market is twice as big as the exchange-traded market.
C.The exchange-traded market is ten times as big as the over-the-counter
market.
D.The over-the-counter market is ten times as big as the exchange-traded
market.
Answer: D
The OTC market is about $600 trillion whereas the exchange-traded market is about
$60 trillion.
6
Cardlink
0
Which of the following best describes the term “spot price”
A.The price for immediate delivery
B.The price for delivery at a future time
C.The price of an asset that has been damaged
D.The price of renting an asset
, Answer: A
The spot price is the price for immediate delivery. The futures or forward price is the
price for delivery in the future
7
Cardlink
0
Which of the following is true about a long forward contract
A.The contract becomes more valuable as the price of the asset declines
B.The contract becomes more valuable as the price of the asset rises
C.The contract is worth zero if the price of the asset declines after the contract
has been entered into
D.The contract is worth zero if the price of the asset rises after the contract has
been entered into
Answer: B
A long forward contract is an agreement to buy the asset at a predetermined price.
The contract becomes more attractive as the market price of the asset rises. The
contract is only worth zero when the predetermined price in the forward contract
equals the current forward price (as it usually does at the beginning of the contract).
8
Cardlink
0
An investor sells a futures contract an asset when the futures price is $1,500.
Each contract is on 100 units of the asset. The contract is closed out when the
futures price is $1,540. Which of the following is true
A.The investor has made a gain of $4,000
B.The investor has made a loss of $4,000
C.The investor has made a gain of $2,000
D.The investor has made a loss of $2,000
Answer: B
An investor who buys (has a long position) has a gain when a futures price increases.
An investor who sells (has a short position) has a loss when a futures price
increases.
9
Cardlink
0
Which of the following describes European options?
A.Sold in Europe
B.Priced in Euros
C.Exercisable only at maturity
D.Calls (there are no European puts)
Answer: C
European options can be exercised only at maturity. This is in contrast to American
options which can be exercised at any time. The term “European” has nothing to do
with geographical location, currencies, or whether the option is a call or a put.
